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Are Operating Expense Up or Down? Making Sense of Changes in Operating Expenses

The accounting difficulties of the NCUSIF stabilization expenses complicate how to determine the extent of credit union cost cutting in the face of the financial meltdown.

Like most businesses, credit unions cut costs in the face of the financial meltdown. However, determining just how much credit unions cut costs last year is difficult given the accounting complications associated with the NCUSIF stabilization expenses.

Both the original fourth quarter 5300 call report and the re-filed report – also called the restatement – that includes the NCUSIF stabilization expenses are required to analyze how operating expenses have changed since 2008. The variances in call reports could lead to two different interpretations for how credit union operating expenses have changed over the past year.

At the end of 2009, credit unions' operating expenses totaled $27.4 billion. When compared to the restatement, operating expenses declined 3.9% annually from $28.5 billion. But when compared to the original filing, operating expenses increased by 2.2% annually, up from $26.9 billion.

The difference between the original filing and the restatement is mostly reflected under spending on member insurance. Because this is where many credit unions accounted for their NCUSIF expense, credit unions reported spending $103.1 million on member insurance in the original filing but in the restatement that number jumped to $1.5 billion. Other credit unions accounted for the expense under miscellaneous expenses. Accordingly, miscellaneous operating expenses increased from $817.1 million in the original filing to $1 billion in the restatement. Differences may obscure changes in credit union spending in these categories, but we can still see credit unions cut costs where they were able.

The low interest rate environment and increased costs of doing business makes it essential to keep expenses down. Credit unions have responded by cutting what variable costs they can. The areas where credit unions have made the biggest cuts are in travel and conferences and marketing. Credit unions spent $1,386 on travel and conferences per employee in 2008 according to both the original filing and the restatement. In 2009, credit unions spent $1,036 on travel and conferences, down 25.2% from the year before. Similarly, marketing expenses declined from $1.1 billion in 2008, according to both the original filing and the restatement, to $926.3 million, a 12.8% decrease in spending.

Despite these cuts in spending, operating expenses have increased in several major areas. Fueled by an increased cost of benefits, spending on employees' salaries and benefits grew by $386.5 million, or 2.8%, despite a 1% reduction in the total number of employees. Loan servicing expenses grew by $164.7 million, or 10.2%, as a result of record sales to the secondary market. Office occupancy and office operation expenses increased with the rising cost of rent and utilities. These areas of increased spending explain why credit unions' operating expenses have risen in comparison to the original filing but not in relation to the restatement.